City fund managers are expressing concern at the sweeping nature of the Government Review of Institutional Investment, which was formally launched by Paul Myners, the chairman of Gartmore, the fund management group, yesterday.
In his consultation document, setting out the terms of the review, Mr Myners said he would be asking whether there were any structural reasons why UK fund managers were more reluctant than their American counterparts to invest in smaller companies and venture capital start-ups. He also highlights the lack of a developed corporate bond market.
Mr Myners insisted that he wanted to consult widely and avoid coming to premature conclusions. However, his preamble echoes frequent complaints from would-be entrepreneurs that UK fund managers are too prone to exist in established companies, particularly those with large market capitalisations, at the expense of higher risk start-ups.
The review looks at whether the growing influence of actuarial consultants on pensions fund trustees and the benchmarks used to measure fund managers' performance are leading to increasingly herd-like and risk averse behaviour by fund managers.
One issue, which Mr Myners highlighted yesterday, was the Minimum Funding Requirement, which was imposed on pension funds by the 1995 Pensions Act, but is already under review. There has been widespread concern in the industry that the MFR discourages pension funds from putting money into non-quoted assets.
"The UK has a very substantial pool of long-term capital and one of the highest percentages of equity investment. This has been of great benefit to beneficiaries but what is becoming apparent is that this money is managed in a surprisingly consensual way," Mr Myners said.
He insisted it was not the job of government to "second-guess" institutions' investment decisions. "But if there are structure factors that are distorting rational decision-making, then there may be a role for government in helping remove these distortions."
Fund managers yesterday expressed relief that the review was not going to be a rerun of the Don Cruickshank review into the banking sector, which led to the banks being referred to the Competition Commission.
Don Brydon who heads the Fund Management Association said he was concerned that the review would lead to "less rigorous measurement" of fund managers performance and would undermine attempts by the UK industry to persuade other European countries to allow pension funds to invest more in equities on the UK model, just when UK lobbying in that area was starting to bear fruit: "The UK has a very successful fund management industry which has delivered for savers excellent returns over a long period," he said.
Some managers were worried that the sheer number of topics being addressed would lead to a report which was superficial and more damaging to the industry than was immediately apparent.
The head of one major international fund management group said yesterday: "Mr Myners is planning to tackle nearly 50 issues ... and he wants submissions in two months. It is bound to be very superficial."
Issues being raised include:* whether actuarial consultants, who advise pension fund trustees, have too much influence;
* whether increasing maturity of pension funds, as a result of the ageing population, is making pension funds more risk-averse;
* the effectiveness of the current system of lay trustees;
* whether the benchmarks used to measure fund managers' performance should be changed;
* whether the concentration of the pension fund industry give rise to competition concerns
* what impact will stakeholder pensions have on investment.
Mr Myners said that he aimed to have his full report ready to present to the Chancellor in time for the next Budget in March 2001.